3
- 3(16)
- The 3(16) Plan Administrator has a fiduciary responsibility for the daily operation of the retirement plan for tasks such as determining eligibility, fixing operational errors, and providing participant disclosures and notices. Thus, helping employers keep tasks accurate and complete.
- 3(21)
- Section 3(21) of ERISA defines a fiduciary as an individual who exercises any discretionary authority or control regarding the management of an employee benefit plan or the disposition of its assets. 3(21) also refers to an individual who renders investment advice to the plan in exchange for compensation
- 3(38)
- A 3(38) Investment Manager is a codified investment fiduciary on a retirement plan as defined by ERISA section 3(38). The 3(38) is responsible for selecting, managing, monitoring, and benchmarking the investment offerings of the plan.
4
- 401(k) Plan
- This is a type of defined-contribution plan whereby participants decide how much pre- or post-tax income they want to contribute from their paycheck. They determine how much to contribute and make their investment selections. While the money is in the plan, all earnings on participants’ accounts are tax deferred, meaning no income taxes are due until the money is distributed.
There are limits, set by the IRS each year, on how much can be contributed to a plan during the plan year.
- 403(b) Plan
- A retirement plan that operates similarly to a 401(k) plan, but is for employees of nonprofit organizations, as well as some religious groups, schools, and government organizations. 403(b) plans can be governed by ERISA or not.
These plans operate much like a 401(k) plan in that participating employees may make elective deferrals and contribute to their retirement on a pre-tax basis. Employees get to decide (within limits set by the IRS) how much to contribute each year and may receive matching contributions or other nonelective contributions from the employer. 403(b) plans can also allow after-tax ("Roth") contributions.
A
- Accrued Interest
- The amount credited to a bond or other fixed-income security between the last payment and when the security is sold, or any intermediate date. The buyer usually pays the seller the security's price plus the accrued interest.
- Adjusted Gross Income (AGI)
- Defined as gross income minus adjustments to income. Gross income includes your wages, dividends, capital gains, business income, retirement distributions as well as other income. Adjustments to Income include such items as Educator expenses, Student loan interest, Alimony payments or contributions to a retirement account. Your AGI will never be more than your Gross Total Income on your return and may be lower in some cases.
- Advisors
- Any person that makes investment recommendations or conducts securities analysis in return for a fee, whether through direct management of clients' assets.
- Annual Return (Form 5500)
- Just like individuals file a tax return, a benefit plan must also file an annual report with the DOL. The Form 5500 is a lengthy report that describes the nature of the plan, the amount of assets in the plan, the names and functions of various companies that perform services for the plan. In general, the Form 5500 is intended to show the government and participants that their retirement funds are safe and that the plan is being managed properly. Large plans (with more than 100 participants at the start of the plan year) must also obtain an independent plan audit and that audit report is filed with the Form 5500. There are also different and more streamlined versions of the Form 5500 for small plans (plans with less than 100 participants at the start of the plan year) and plans established for businesses with only one employee (referred to as a “solo 401(k)”). The Form 5500 is due at the end of the 7th month after the end of the plan year (in other words, July 31 for plans that operate on a calendar year), which is why the second quarter of the year is among our busiest times of year.
- Annuity
- A contract between you and an insurance company in which you make a lump-sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future.
- Asset Allocation
- Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon. The three main asset classes - equities, fixed-income, and cash and equivalents - have different levels of risk and return, so each will behave differently over time.
- Asset Class
- A group of securities or investments that have similar characteristics and behave similarly in the marketplace. Three common asset classes are equities (e.g., stocks), fixed income (e.g., bonds), and cash alternatives or equivalents (e.g., money market funds).
- Assets Under Management (AUM)
- The total market value of the investments that a person or entity manages on behalf of clients.
- Audit
- An objective examination and evaluation of the financial statements of organization to ensure that financial records are an accurate representation of the transactions represented. There are 3 types of audits: external, internal, and IRS. External audits are performed by Certified Public Accounting (CPA) firms and result in the auditor’s opinion, included in the report, and can include a review of the company’s financial statements and internal controls. Internal audits serve as a managerial tool meant to improve processes and internal controls, ensure compliance with laws/regulations, and to maintain accurate financial reporting and data collection. Routine IRS audits are performed to verify the accuracy of a taxpayer’s return and specific transactions.
- Automated Clearing House (ACH)
- The automatic electronic withdrawal of funds from a bank account for use with payroll, direct deposit, tax refunds, consumer bills, tax payments, and many more payment services in the United States.
- Auto-Enrollment
- An auto-enrollment plan is a retirement savings plan in which employees are automatically enrolled to contribute a certain amount of their salary each paycheck.
- Auto-Enrollment Arrangement (EACA)
- A plan feature that, as the name suggests, automatically enrolls employees once they become eligible. All employees in these plans receive a notice called an Eligible Automatic Enrollment Arrangement that describes the plan’s default percentage. It may allow employees to opt out of automatic enrollment contributions (with earnings) by making a withdrawal election as required by the terms of the plan (no earlier than 30 days or later than 90 days after the employee’s first automatic enrollment contribution was withheld from the employee’s wages).
B
- Basis Point
- One basis point is a hundredth of 1%. Vestwell's fees are charged in three parts: an initial fee to set up and administer the plan each year; a monthly fee per participant; and a certain basis points of total assets of the plan measured at the end of each quarter.
- Beneficiary
- A person or entity designated by the participant to receive the proceeds from the retirement account after death of the plan participant.
- Blackout Period
- When a plan sponsor decides to switch from one plan vendor to another, there is typically a period during which participants are not permitted to make changes in their investment selections. This is known as the blackout period. Once the blackout period commences and until it ends, participants can no longer direct the investments in their accounts. Blackout periods can last up to 60 days.
- Bond
- A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments; used by companies, municipalities, states, and sovereign governments to finance projects and operations.
C
- Cash Balance Plan
- Cash balance plans allow the participant and plan sponsor to set aside money for the participant using a formula that is set forth in the plan document (usually a combination of age, years of service, average compensation, mortality assumptions).
- Catch-up Provision
- A provision found in some 401k plans that allows an eligible employee who are at least age 50 to make higher annual contributions in the years prior to retirement.
- Compliance Tests (aka Annual Non-Discrimination Tests)
- In order to receive the tax benefits of operating a retirement plan, the IRS requires all tax-qualified plans to pass a series of tests each year. There are different tests for different types of plans. Generally, each plan must pass a coverage test to show that the plan is offered to a fair cross section of highly compensated employees and non-highly compensated employees; non-discrimination tests to make sure the actual benefits are offered to a fair cross section of those employees; and top-heavy tests to make sure the total benefits accrued in the plan are not disproportionately limited to key employees.
- Compounding
- The cumulative effect that reinvesting an investment’s earnings can have by generating additional earnings of their own.
- Contributions
- Amounts which are to be invested in the plan in accordance with participant direction. The Contributions are deposited into the participant’s plan account and held there until the date that we complete its processing of such Contributions and forward them to be invested in the Plan Investments that the participant has selected.
- Controlled Groups / Affiliated Service Groups
- Controlled groups / affiliated service groups - refers to a certain level of common ownership between plan sponsors. When owners of a plan sponsor also own certain levels of another organization, it can have consequences in terms of compliance testing and it could require the plan sponsor to offer the plan to various employees of those related organizations.
- Custodian
- A person or financial institution that holds customers' securities and other assets (electronic or physical) for safekeeping in order to minimize the risk of their theft or loss.
D
- Default Deferral Rate
- In the case of an automatic contribution arrangement in a 401k plan, the percentage of compensation, specified in the plan, withheld automatically from a covered participant's compensation (unless the participant elects otherwise) and contributed to the plan as an elective deferral.
- Deferral / Elective Deferral
- The amount of money employees choose to deduct from their paycheck and invest into a retirement plan. The amount can be any percentage that the participant wants, but only up to the annual pre-tax limit ($19,000 for 2019 + $6,000 as a catch up contribution for participants age 50 or older).
- Defined Benefit Plan
- An employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history.1 The company administers portfolio management and investment risk of the plan. There are also restrictions on when and by what method an employee can withdraw funds without penalties. Benefits paid are typically guaranteed for life and rise slightly to account for the increased cost of living.
- Defined Contribution Plan
- A retirement plan that's typically tax-deferred, like a 401(k) or a 403(b), in which employees contribute a fixed amount or a percentage of their paychecks to an account that is intended to fund their retirements. The sponsor company will, at times, match a portion of employee contributions as an added benefit. These plans place restrictions that control when and how each employee can withdraw from these accounts without penalties.
- Direct Rollover
- A tax-deferred transfer of assets from one qualified retirement plan to another qualified retirement plan or IRA. Sometimes called a "trustee to trustee" transfer. The transfer is made without any funds being sent directly to the plan participant.
- Distributions
- Refers to a withdrawal from a qualified retirement plan. These distributions are both tax- and penalty-free. Eligible plans from which a qualified distribution can be made include 401(k)s and 403(b)s.
- Dividend
- Money an investment fund or company pays to its stockholders, typically from profits. The amount is usually expressed on a per-share basis.
- DOL
- Acronym for the U.S. Department of Labor; their mission is to foster, promote, and develop the welfare of the wage earners, job seekers, and retirees of the United States; improve working conditions; advance opportunities for profitable employment; and assure work-related benefits and rights.
- Dollar-cost Averaging
- A process of buying securities at regular intervals and at a fixed dollar amount. When prices are lower, the investor buys more shares or units; when prices are higher, the investor purchases fewer shares or units. Over time, this typically results in a better average price for all shares or units purchased.
E
- Elective Deferral Contributions
- A contribution that is made to a retirement savings plan, which generally represents a percentage of an employee's compensation.
- Eligibility
- A set of rules that are set forth in the plan document that a participant must satisfy in order to participate in the plan. Usually, it is a combination of age and service with the plan sponsor. The plan sponsor is generally free to decide how it wants to set those eligibility rules, as long as: a - they do not create compliance issues for the plan (ie: the rules do not end up allowing a disproportionate number of highly compensated employees to participate in the plan relative to the number of non-highly compensated employees); and b) the rules do not exceed IRS thresholds (ie: cannot require age to be over age 21 and/or more than 2 years of service.
- Employer Contributions
- The amount that the Plan Sponsor puts into the plan, usually in the form of an employer match.
- Employer Matching
- Employer matching of your 401(k) contributions means that your employer contributes a certain amount to your retirement savings plan based on the amount of your own annual contribution.
- Enrollment Date
- The date(s) on which eligible participants can enroll in the plan. We prefer to have quarterly enrollment periods where possible as they are easier to administer (but entrance dates can be monthly or semi-annually, for example).
- ERISA
- Employee Retirement Income Security Act of 1974, as amended. This law was passed in 1974 and is a comprehensive package dealing with all areas of pensions and employee benefits, not just 401k plans. ERISA includes requirements on pension disclosure, participation standards, vesting rules, funding, and administration.
- Expense Ratio (ER)
- The expense ratio (ER), also sometimes known as the management expense ratio (MER), measures how much of a fund's assets are used for administrative and other operating expenses. An expense ratio is determined by dividing a fund's operating expenses by the average dollar value of its assets under management (AUM). Operating expenses reduce the fund's assets, thereby reducing the return to investors.
- Exchange Traded Fund (ETF)
- An exchange traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies. ETFs are in many ways similar to mutual funds; however, they are listed on exchanges and ETF shares trade throughout the day just like ordinary stock.
F
- Federal Income Tax
- Tax levied by the Internal Revenue Service (IRS) on the annual earnings of individuals, corporations, trusts, and other legal entities. Federal income taxes are applied to all forms of earnings that make up a taxpayer's taxable income, such as employment earnings or capital gains.
- Fidelity Bond
- A bond which ERISA requires every plan fiduciary to be covered by and which names the plan as the insured. The coverage is a minimum of $1,000 or 10% of plan assets up to a maximum of $500,000.
- Fixed Income Security
- An investment that provides a return in the form of fixed periodic interest payments and the eventual return of principal at maturity. Bonds are the most common type of fixed-income security, but others include CDs, money markets, and preferred shares.
- Form 5500
- See "Annual Return"
- Fund Family
- A group or “complex” of mutual funds, each typically with its own investment objective, and managed and distributed by the same company. A Fund Family also could refer to a group of collective investment funds or a group of separate accounts managed and distributed by the same company.
G
- Glide Path
- The model used for target date funds to describe how the mix of stocks and bonds automatically changes over time. A glide path can either be "to retirement" (meaning that it is intended to provide risk-based allocations to a participant up to the age of retirement) or "through retirement" (meaning that it is intended to provide risk-based allocations to a participants through their working and retirement years).
H
- Hardship
- Difficulty in paying the repayments on your loans and debts when they are due.
- Highly Compensated Employee (HCE)
- An employee who: 1) was a “5% Owner” at any time during the current or preceding plan year or 2) for the preceding plan year: had compensation in excess of $130,000 (indexed annually) and, if elected by the employer, was in the top 20% of employees when ranked by order of highest compensation for the preceding plan year. NHCE = everyone else. Important Note: A participant is determined to be an HCE based on the prior year's compensation.
I
- Index Fund
- An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover. These funds follow their benchmark index regardless of the state of the markets.
- Investing
- Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit.
- Investment Elections
- An investment election change updates the percentages that are used to invest future deposits; a transfer, realignment or automatic rebalance moves the money that is already invested in your account.
- Individual Retirement Account (IRA)
- A tax-advantaged investing tool dependent upon job/compensation that individuals use to allot funds for retirement savings and typically involves penalties if withdrawing funds before age 60. There are several types of IRAs as of 2020: Traditional, Roth, SEP, SIMPLE.
- Internal Revenue Code (IRC)
- Legislation governing federal tax law enacted into law in 1939 as a compilation of U.S. statutes relating to internal revenue from 1862 to 1938 that were still in force in 1939. A revised Internal Revenue Code was enacted in 1954, and the 1954 Code was revised and redesignated the Internal Revenue Code of 1986 by the Tax Reform Act of 1986. The Code defines the scope and operation of the entire U.S. tax system.
K
- Key Employee
- An employee who meets any of the following criteria in the plan year: 5% Owner, 1% Owner and has compensation in excess of $150,000, or Officer and has compensation in excess of $175,000.
L
- Loan
- A loan is money, property, or other material goods given to another party in exchange for future repayment of the loan value or principal amount, along with interest/finance charges; may be for a specific, one-time amount or can be available as an open-ended line of credit up to a specified limit/ceiling amount.
- Loans Servicing
- The administrative aspects of a loan from the time the proceeds are dispersed to the borrower until the loan is paid off. Loan servicing includes sending monthly payment statements, collecting monthly payments, maintaining records of payments and balances, collecting and paying taxes and insurance (and managing escrow funds), remitting funds to the note holder, and following up any delinquencies.
M
- Multi-Factor Authentication (MFA)
- A security enhancement that allows you to present two pieces of evidence – your credentials – when logging in to an account. Your credentials fall into any of these three categories: something you know (like a password or PIN), something you have (like a smart card), or something you are (like your fingerprint). Often referred to as two-factor authentication or 2FA.
- Multiple Plan (MEP)
- A MEP is a defined benefit or defined contribution plan between two or more related employers, but the employers must not have a common ownership that rises to the level of a controlled group or affiliated service group.
- Mutual Fund
- A type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets.
N
- Nonelective Contribution (NEC)
- Funds employers choose to direct toward their eligible workers' employer-sponsored retirement plans regardless if employees make their own contributions. These contributions come directly from the employer and are not deducted from employees' salaries.
P
- Plan Document
- A plan document governs a retirement plan's features and day-to-day operations.
- Plan Administrator
- A person or Company responsible for managing a retirement fund or a pension plan on behalf of its participants and beneficiaries; they are tasked with ensuring the funds are properly collected and distributed to all qualified participants.
- Plan Fiduciary
- Plan fiduciaries include plan trustees, plan administrators, and members of a plan's investment committee. The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses.
- Plan Sponsor
- A company or employer that sets up a retirement plan for the benefit of the organization's employees.
- Plan Trustee
- A person or company who has exclusive authority and discretion to manage and control assets of a plan for the benefit of a third party.
- Plan Year
- The 12-month period in which a plan is active, such as Nov. 1 through Oct. 31; changes to the retirement plan are restricted until the next open enrollment period.
- Plan-Year End (PYE)
- Refers to the completion of a one-year or 12-month period for a retirement plan.
- Pooled Employer Plan (PEP)
- Is a defined contribution plan, such as a 401(k), in which multiple employers can participate. When employers join a PEP, they delegate their named fiduciary role to a third-party pooled plan provider (PPP).
- Pricing
- The process of an issuer determining the appropriate price of a new issue. That is, the issuer prices when it figures out what coupon rate to promise for a bond or price at which to issue a stock. This can be complex because pricing too far in one direction means the issue will not sell while too far in the other direction raises the cost of funds too high.
- Profit Sharing
- A retirement plan that gives employees a share in the profits of a company. Under this type of plan, also known as a deferred profit-sharing plan (DPSP), an employee receives a percentage of a company’s profits based on its quarterly or annual earnings.
- Proposal
- A formal/written plan put forward for consideration; a report that details the future of a business's economy by addressing its monetary needs and budget.
- Prospectus
- A formal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering to the public.
Q
- Qualified Default Investment Alternative (QDIA)
- The 401(k) Qualified Default Investment Alternative allows plan sponsors to have the option to designate a default investment fund into which all elective deferrals shall be deposited unless the participants designate another election. Only certain kinds of investments can qualify. All participants in a plan with a QDIA must receive a notice with instructions about how to change their elections at least 30 days prior to the beginning of the next plan year.
- Qualified Domestic Relations Order (QDRO)
- A judgment, decree or order that creates or recognizes an alternate payee's (such as former spouse, child, etc.) right to receive all or a portion of a participant's retirement plan benefits.
R
- Reconciliation
- An accounting process that compares two sets of records to check that figures are correct and in agreement; also confirms that accounts in the general ledger are consistent, accurate, and complete.
- Recordkeeper
- Term for the plan's investment platform and often the custodian of the plan's assets.
- Rollover
- The balance in an employee's retirement account from a prior employer or IRA. Rollovers can be "incoming" (ie: coming into their Vestwell retirement plan) or "outgoing" (ie: going to a participant's new employer retirement plan or IRA; they are given those options when they terminate employment or retire).
S
- Saver
- An employee of the plan sponsor who is not excluded and has satisfied the plan's eligibility requirements and is entitled to participate in the plan.
- SIMPLE (Savings Incentive Match Plan for Employees) 401k
- A Savings Incentive Match Plan for Employees, or SIMPLE 401(k), is a type of employer-sponsored 401(k) plan structured for small businesses with 100 employees or fewer. It is a cost-effective way for small businesses to offer a qualified plan to employees who have received at least $5,000 in wages in the previous calendar year. For employees, a SIMPLE 401(k) can be a tax-deferred way to save for retirement, and because the money is 100% vested, it's theirs to keep.
- SIMPLE (Savings Incentive Match Plan for Employees) IRA
- The Small Business Job Protection Act of 1996 led to the creation of the Savings Incentive Match Plan for Employees (SIMPLE IRA). SIMPLE IRAs are generally tailored to small businesses and self-employed individuals. In fact, an employer may only sponsor a SIMPLE IRA plan if they have 100 employees or fewer earning $5,000 in the prior calendar year. Employers that are part of a controlled group should take care when considering a SIMPLE IRA and be sure to include all employees in the controlled group when determining their employee count. As an employer grows, it may exceed the 100 employee threshold. There’s a grace period of two years though, to accommodate growing businesses.
- SECURE Act
- Acronym for Setting Every Community Up for Retirement Act of 2019;
- Simplified Employee Pension (SEP)
- A SEP plan provides business owners with a simplified method to contribute toward their employees’ retirement as well as their own retirement savings. Contributions are made to an Individual Retirement Account or Annuity (IRA) set up for each plan participant (a SEP-IRA). A SEP-IRA account is a traditional IRA and follows the same investment, distribution, and rollover rules as traditional IRAs.
- Social Security Administration (SSA)
- The Social Security Administration assigns Social Security numbers, and administers the Social Security retirement, survivors, and disability insurance programs. They also administer the Supplemental Security Income program for the aged, blind, and disabled.
- Social Security Numbers (SSN)
- A SSN is a nine-digit number that the U.S. government issues to all U.S. citizens and eligible U.S. residents who apply for one. The government uses this number to keep track of your lifetime earnings and the number of years worked.
- SPD
- Summary Plan Description for ERISA employee benefit plans. ERISA requires a Summary Plan Description (SPD) be distributed to each plan participant and to each beneficiary receiving benefits under the plan as follows: For existing plans, a new participant must receive a copy of the SPD within 90 days after becoming a participant, and a beneficiary must receive a copy within 90 days after first receiving benefits.
- Stock
- Also known as equity, a stock is a security that represents the ownership of a fraction of a corporation. This entitles the owner of the stock to a proportion of the corporation's assets and profits equal to how much stock they own. Units of stock are called shares. Stocks are bought and sold predominantly on stock exchanges, though there can be private sales as well, and are the foundation of many individual investors' portfolios. These transactions have to conform to government regulations which are meant to protect investors from fraudulent practices.
T
- Target-Date Fund (TDF)
- A fund offered by an investment company that seeks to grow assets over a specified period. The structuring of these funds addresses an investor's capital needs at some future date—hence, the name "target date." Most often, investors will use a target date fund to apply to their onset of retirement.
- Tax-Deferred
- Tax-deferred status refers to investment earnings such as interest, dividends, or capital gains that accumulate tax-free until the investor takes constructive receipt of the profits.
- Third Party Administrator (TPA)
- An organization that manages day-to-day aspects of your employee retirement plan.The bundled provider is where one single 401(k) provider provides all investment, recordkeeping, administration, and education services. The unbundled provider is where the plan sponsor may choose a variety of providers to provide one or more of those services.
- Trust Company
- A legal entity that acts as a fiduciary, agent, or trustee on behalf of a person or business for the purpose of administration, management, and the eventual transfer of assets to a beneficial party. The trust company acts as a custodian for trusts, estates, custodial arrangements, asset management, stock transfer, beneficial ownership registration, and other related arrangements.
- Trustee
- A trustee of a qualified retirement plan is the entity or group of individuals who hold the assets of the plan in trust. Trustees are either designated in the plan document or appointed by another fiduciary, typically the employer who sponsors the plan.
V
- Vesting
- The period of time an employee must work at a firm before gaining access to employer-contributed pension income. For 401(k) plans, employee contributions are immediately vested, but employer contributions may be vested over a period of several years.
Y
- Years of Service (YoS)
- The length of employment, which is measured to determine eligibility, vesting, and benefits levels for employee participants in tax-qualified pension plans.
- Year-End Testing (YET)
- Compliance testing.
- Yield
- The value of interest or dividend payments from an investment, usually stated as a percentage of the investment price.
